Q3 2024 Dropbox Inc Earnings Call
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Good afternoon, ladies and gentlemen, thank you for joining Dropbox third quarter 'twenty 'twenty four earnings conference call all participants will be in listen only mode.
After todays presentation, there will be an opportunity to ask questions to ask a question. During the session you will need to press star one one on your telephone as a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox as website. Following this call.
Speaker Change: I will now turn it over to Peter Stabler head of Investor Relations.
Peter Stabler: Thank you good afternoon, and welcome to Dropbox in third quarter of 2024 earnings call.
Peter Stabler: Before we get started I would like to remind you that our remarks today will include forward looking statements such as our financial guidance and expectations, including our long term objective and forecasts for our fourth quarter fiscal year 2020 for fiscal year, 2025, and our expectations regarding our revenue growth profitability operating margins.
Peter Stabler: And free cash flow.
Peter Stabler: As well as our expectations regarding our business assets product strategy technology employees users demand in the macroeconomic environment.
Peter Stabler: These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Peter Stabler: They are also based on assumptions as of today and we undertake no obligation to update them as a result of new information or future events.
Peter Stabler: Factors and risks that could cause our actual results to differ materially from these forward looking statements are set forth in todays earnings release and in our quarterly report on Form 10-Q filed with the SEC.
We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
Peter Stabler: A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors Dropbox Dot com.
Speaker Change: I will now turn the call over to Dropbox as co founder and CEO drew Houston.
Drew Houston: Thanks, Peter and good afternoon, everyone. Welcome to our Q3 2024 earnings call and I'm here with Tim <unk> our CFO.
Drew Houston: I will cover our recent business updates and strategy and then Tim will walk through our Q3 results and our outlook.
Drew Houston: Last week, we announced a 20% reduction in our workforce.
Drew Houston: This is an incredibly difficult decision and I want to acknowledge all of the folks at Dropbox who were impacted.
Drew Houston: But it is a necessary step to position for our next chapter.
Drew Houston: As we've discussed over the last year, we're at an inflection point as a company.
Drew Houston: Our core FSS business has matured and we've been investing in new products to solve new problems and drive growth.
Drew Houston: But given the challenging environment for our core business, we needed to better align our investments with the opportunities ahead.
Drew Houston: Beyond the head count reduction, we also simplified our org structure.
Drew Houston: We've become too complex and layered over time, which is slowing us down and hurting our execution.
Drew Houston: So we designed a flatter and more balanced organization, reducing the number of layers, while better aligning our teams around our key priorities.
Drew Houston: Now, let's talk about where we're headed.
Drew Houston: Over our first 17 years, we built a large and profitable business, helping hundreds of millions of users secure organize and share their files.
But today's workplace has evolved dramatically.
Drew Houston: Content is now scattered across dozens of cloud tools and browser types, not just files and folders.
Drew Houston: We're all struggling with the same core problem I started dropbox to solve which is spending too much time searching for stuff and trying to stay on top of our work.
Drew Houston: And the challenges go beyond just finding things.
Drew Houston: There is no consistent way to organize your cloud content, because when you close your browser workspace and all your tabs disappear.
Drew Houston: There is no common way to collect and share of different kinds of cloud content across platforms.
Drew Houston: And for ITE teams, the shift to distributed work and the resulting proliferation of tools, that's created even bigger headaches around security and around governance.
Drew Houston: The good news is that AI get this powerful new tools to address these universal problems.
Drew Houston: That's why we've been hard at work on Dropbox Dash, our AI powered universal search product.
Drew Houston: After launching an initial version for individuals last year, we just released ask for business in October.
Drew Houston: The business version of Dash combines AI powered universal search and organization with Universal content access controls and governance.
Drew Houston: We're focusing our initial sales efforts on our over 500000, FSS teams customers, who already trust us with their content.
Drew Houston: It's early days, but the initial feedback has been really encouraging.
Drew Houston: Both among our existing Dropbox FSS customers and prospects that are new to dropbox.
Drew Houston: Dash helps you instantly find anything across all your work tools from a single search box. It uses AI to summarize and answer questions about your company's content and it gives you a personalized start page that connects your meetings your docs in your projects.
Drew Houston: But what's really resonating with IP leaders, it's actually a unique governance capabilities, which we call protected control.
Drew Houston: For the first time admins get real time visibility into everything Thats shared in the company across every major content platform from one dashboard with powerful controls to protect sensitive content.
Drew Houston: Most companies we talked to you are doing this manually today, so they've told us they see huge value and automating this and extending these capabilities.
Drew Houston: And overall, we know this market is attracting significant attention and investment, which both validates the opportunity we've been pursuing while also underscoring the importance of moving quickly to capture it.
Drew Houston: So as we reposition the company around Dash, we're evolving our FSS business to maintain its strengths while accelerating dashes adoption.
Drew Houston: And rather than trying to re inflect FSS growth, we're shifting our focus to product quality to retention and efficiency and serving as a springboard for dash.
Drew Houston: This means doubling down on our strengths being a simple and reliable and platform agnostic solution that our customers love.
Drew Houston: And teams remain a priority given the higher ARPA lifetime value retention profile and strong cross sell potential for dash.
Drew Houston: And given that our FSS users also have unmet needs around finding and organizing their cloud content, we see a significant opportunity to bring some of the dash has capabilities to our core FSS product. While also turning our massive FSS user base into a natural growth engine for dash.
Drew Houston: We're also reassessing our document workflow investments.
Drew Houston: We will continue developing document features like virtual data rooms, while focusing sign on retention.
Drew Houston: But farm Swift, which we acquired to expand our capabilities required significant investment that we now believe is better spent on dash.
Drew Houston: So we are exploring strategic options, there, including a potential sale.
Drew Houston: Looking ahead, we're still in the early days of AI transforming work.
Drew Houston: While we're focused on dash near term, we're also exploring adjacent opportunities too.
Drew Houston: Our recent acquisition of reclaimed which brings AI powered calendar in time optimization capabilities.
Drew Houston: And over time, we see potential for a broad suite of AI tools that make knowledge work more productive and will leverage our massive user base, our trusted brands and our technical infrastructure to accelerate adoption.
Drew Houston: But to fully capture this opportunity we have to stay focused and prioritize.
Drew Houston: Our core business gives us a powerful foundation to build on.
Drew Houston: And while it will take time to change our growth trajectory. Our conviction continues to grow as we solve real customer problems.
Drew Houston: Evolving from thinking your files to organizing and securing all your cloud content is a natural evolution for Dropbox, and we're well positioned to win in this new market.
Speaker Change: I'll now hand, it over to Tim to cover our results and outlook.
Tim: Thank you drew.
Tim: I'll cover our financial highlights from Q3 and provide guidance for Q4.
Tim: And offer some initial thoughts on our outlook for 2025.
Tim: Starting with our results for the third quarter.
Tim: Total revenue for Q3 increased.
Tim: 9% year over year.
Tim: $639 million, including approximately $800000 contribution.
Tim: From our naira and reclaim acquisitions.
Tim: As expected foreign exchange rates did not materially impact our revenue for the quarter.
Tim: Total <unk> grew to a total of $2 $5 $79 billion up two 1% year over year.
Tim: On a constant currency basis growth was one 4% year over year.
Tim: Our growth in IRR was largely driven by our individual plans.
Tim: Across both our plus and essentials skus.
Tim: While we continue to strategically prioritize our team Skus and we're seeing progress on team's engagement.
Tim: Activation and top of funnel metrics. We also continued to face headwinds include.
Tim: Including pricing sensitivity.
Tim: That are pressuring our team expansion in downhill trend.
Tim: Okay.
Tim: We exited the quarter with $18, two 4 million paying users, adding approximately 19000 net new paying users on a sequential basis.
Tim: I would note that our paying user count for the quarter includes approximately 23000 paying users.
Tim: We added in the quarter through our acquisition of reclaim.
Tim: Which we closed in late July.
Tim: Mirror data access governance platform, we acquired in May did not have a material impact on our paying user count for either Q2 or Q3 as we sell just one license per company.
Tim: Across our FSS and document workflow businesses we.
Tim: We saw sequential additions of paying users for individual plans led by our plus and essentials skus.
Tim: These gains were more than offset by downhole pressure across our teams plans and form Swift.
Tim: Consistent with the commentary we offered on last quarter's call.
Tim: Average revenue per paying user was $139 <unk>.
Tim: Comparing to $138 71 in the year ago period.
Tim: On a year over year basis, <unk> benefited from a shift to higher priced plans and a modest benefit from a mix shift from annual to monthly plans.
Tim: This quarter's sequential decline was driven primarily by the roll back in late March pricing increases associated with our bundled products that we introduced last year.
Tim: Before we continue with further discussion of our P&L I would like to note that unless otherwise indicated all income statement figures mentioned, our non-GAAP and exclude stock based compensation.
Tim: Amortization of purchased intangibles certain acquisition related expenses and workforce reduction expenses.
Tim: Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments.
With that let's continue with the third quarter P&L.
Tim: Gross margin was 84% for the quarter.
Tim: As mentioned in previous quarters, the primary driver of the year over year increase in gross margin.
Tim: Was the increase in the useful life of our servers from four to five years effective January 1st of this year.
Tim: This change resulted in an approximately $7 million of benefit to gross profit in the third quarter.
Tim: The impact of this change was weighted towards the first half of this year.
Tim: For the full year, we expect the benefit to gross profit of approximately $30 million.
Tim: Operating margin was 36, 2% ahead of our guidance of 32% and up 20 basis points from the year ago period.
Tim: Compared to our guidance operating margin benefited from lower than anticipated marketing spend reduced outside services spend and lower workforce expenses.
Tim: Net income for the third quarter was $190 million down 2% year over year, driven by higher taxes.
Tim: Diluted EPS for the third quarter was 60.
Tim: Based on 316 million diluted weighted average shares outstanding compared to <unk> 56 in the year ago quarter, representing a 7% year over year increase.
Tim: Moving on to our cash balance and cash flow, we ended the quarter with cash and short term investments of $891 million.
Tim: Cash flow from operations was $274 million, an increase of 7% versus the year ago period.
Tim: Capital expenditures in the quarter totaled $4 million. This resulted in quarterly free cash flow of $270 million compared to $247 million in Q3.
Tim: 2023.
Tim: Free cash flow per share for the quarter was <unk> 85, representing a 20% year over year increase.
Tim: In the quarter, we also added $58 million to our finance leases for data center equipment.
Tim: Yeah.
Tim: In Q3, we repurchased approximately 15 million shares.
Tim: Spending approximately $349 million.
Tim: As of the end of the third quarter.
We had approximately $519 million remaining under our current repurchase authorization.
Tim: We remain committed to our repurchase program.
Tim: Which aims to reduce share count over time and return capital to our shareholders.
Tim: Regarding our balance sheet as a reminder, we currently have three instruments in place.
Tim: One $4 billion of zero percent coupon convertible notes.
Tim: But equally across two tranches maturing in March of 2026 and 2028.
Tim: And the $500 billion revolving credit facility that terminates in February 2026.
Tim: We are mindful of course of our maturity calendar and have confidence in our ability to successfully access the capital markets.
Tim: We have nothing specific to share at this time, but we will keep investors updated on our plans as they solidify.
Speaker Change: I will now offer our updated outlook for Q4 and the full year.
Speaker Change: I'll then share some context on this guidance and provide some preliminary thoughts on 2025.
Speaker Change: But the fourth quarter of 2024, we expect revenue to be in the range of 637.
Speaker Change: $640 million.
Speaker Change: We are expecting a currency tailwind of approximately $3 million in dust on a constant currency revenue basis.
Speaker Change: We expect revenue to be in the range of 634.
Speaker Change: The $637 million.
Speaker Change: We expect our non-GAAP operating margin to be approximately 36%.
Speaker Change: This includes a partial quarter's benefit from the reduction in force actions announced last week.
Speaker Change: And excludes approximately $50 million of expenses related to our workforce reduction.
Speaker Change: Finally, we expect diluted weighted average shares outstanding to be in the range of 307.
Speaker Change: The 312 million shares.
Speaker Change: Based on our 30 day trailing average share price.
Speaker Change: For the full year 2024, we expect revenue to be in the range of 2.542.
Speaker Change: To $5 $45 billion.
Speaker Change: On a constant currency basis, we expect revenue of $2 five through eight.
Speaker Change: The 254 1 billion.
Speaker Change: Billion.
Speaker Change: We expect gross margin to be approximately 84% up from our prior guidance range of 83% to 83, 5%.
Speaker Change: We expect non-GAAP operating margin to be approximately 36%.
Speaker Change: Up from our previous guidance range.
Speaker Change: Of $33, 5% to 34%.
Speaker Change: I would note that this margin guidance excludes the aforementioned severance and benefits we expect to pay in Q4.
Speaker Change: We are reducing our free cash flow range from $910 million to $950 million.
Speaker Change: Two 860.
Speaker Change: Two $875 million.
This accounts for a severance expectations, where we ultimately expect to pay approximately $65 million of severance and benefits.
Speaker Change: As it related to a workforce reduction with roughly $55 million expected to be paid in 2024.
Speaker Change: And the remainder to be paid in 2025.
As it relates to capital expenditures, we now expect capex to be between $20 million to $25 million for the full year down.
Speaker Change: Down from our prior guidance of $20 million to $30 million.
We continue to expect additions to finance lease lines to be approximately 7% of revenue.
Speaker Change: Finally, we are reducing our 2024 of diluted weighted average shares outstanding guidance range by.
Speaker Change: By 1 million shares to 322 to 327 million shares.
Speaker Change: I'll now share some additional perspective on this updated guidance for 2024.
Speaker Change: First.
Speaker Change: Some additional thoughts on our workforce reduction, where our intent was to identify and address areas of inefficient spend.
Speaker Change: While reallocating resources to areas of higher future potential growth.
Speaker Change: The reductions were thus largely targeted towards R&D and sales and marketing teams supporting our mature file sync and share category.
As well as some reductions in our document workflow businesses as we aim to operate these collective varies with the intention of driving higher levels of free cash flow.
Speaker Change: While we expect that these decisions will lead to operating margin and free cash flow expansion. We also expect a corresponding modest headwind to revenue growth given the reduced levels of investment behind these areas.
Speaker Change: With this context in consistent with our historical approach.
Speaker Change: Our revenue guidance reflects what we have a high degree of visibility into today.
Speaker Change: We continue to face a challenging operating environment, particularly for our teams product for.
Speaker Change: The progress we've made on some engagement and top of funnel metrics has yet to translate into <unk> gains.
Speaker Change: Offsetting pressure, we're seeing on upsell and down sell trends.
Speaker Change: Given the latest trends as well as the anticipated headwind to revenue as a result of our risks.
Speaker Change: We are adjusting our full year revenue guidance range to be.
Speaker Change: Two 542 to two $5 5 billion.
Speaker Change: With respect to paying users as we mentioned last quarter, we continue to face near term downside risk associated with some of our larger teams accounts.
Speaker Change: As well as some seasonal pressure from form Swift that we expect to negatively impact our paying user count in Q4.
Speaker Change: We expect this pressure to more than offset growth in individual plans, yielding a modest sequential contraction.
Speaker Change: Paying user count for Q4.
Speaker Change: As it relates to operating margins, we have increased our operating margin expectations of $33, 5% to 34% to approximately 36%.
Speaker Change: This increase reflects the savings we expect from a reduction in force.
Speaker Change: As it relates to free cash flow, we have reduced our expectations to 860 $875 million.
Speaker Change: This reduction is largely due to the severance payments associated with our reduction in force as well as additional impacts.
Speaker Change: From our reduced expectations on billings.
Speaker Change: And lower interest income.
Speaker Change: Given our increased levels of share repurchase activity.
Speaker Change: I'll now share some early thinking on 2025, we will provide official guidance during our February 2025 earnings call.
Speaker Change: Please note that the following commentary does not account for the result of any strategic decisions, we may make for forms with.
Speaker Change: Given that the result of that assessment is not known at this time.
Speaker Change: For revenue our growth expectations exiting Q4 of 24 are indicative of our current trajectory across our core.
Speaker Change: And document workflow businesses.
Speaker Change: While we're optimistic that the improvements we've made and are continuing to make to the team's product.
Speaker Change: Yield better operating performance in the future it's difficult to predict when our efforts will begin to bear measurable fruit.
Speaker Change: In addition, we may face additional headwinds in these areas subsequent to our risked given a reduced level of resourcing and marketing investment.
Speaker Change: Lastly, though we are seeing and customer enthusiasm for dash for business. It will take time before dash will meaningfully impact our revenue growth rate.
Speaker Change: Therefore, given the nascent state of dash and the current outlook for our file sync and share business.
Speaker Change: Our early view for 2025.
Speaker Change: We're roughly flat constant currency revenue relative to 2024.
Speaker Change: This preliminary outlook may dip slightly negative if we see a prolonged continuation of the challenging team expansion and.
Speaker Change: And down sell trends across our teams skus.
Speaker Change: We could also show positive growth, if we were able to reverse these team trends or have success driving the adoption of dash.
Speaker Change: Moving to operating margins in 2025, we expect to see a benefit to margin stemming from a reduction in force.
This benefit however will be partially offset by a few factors.
Speaker Change: First.
Speaker Change: 2024 benefited from a $30 million tailwind through the extension of the useful life of our data center hardware or we will not see the tailwind next year.
Speaker Change: Second in addition to our annual merit increases for our workforce.
Speaker Change: We will also be investing across both R&D and sales and marketing to scale dash as well as back filling select positions.
Speaker Change: Sequent to our risks.
Speaker Change: Thus, while we are not offering precise guidance at this point.
Speaker Change: We expect 2025% non-GAAP operating margin expansion of approximately 150 basis points.
Speaker Change: Relative to 2024.
Speaker Change: We also expect free cash flow to be at or above $950 million, given the aforementioned revenue and operating margin commentary.
Speaker Change: I would note that this preliminary figure includes a $36 million headwind.
To the third and final tranche of our San Francisco lease buyouts that we executed last year.
Speaker Change: As well as additional cash taxes.
Speaker Change: In summary, we are making changes to our core file sync and share and document workflow businesses.
Speaker Change: Designed to improve their efficiency levels and yield higher levels of free cash flow per share.
Speaker Change: Concurrently we continue to invest in areas, where we see the largest opportunities for future growth.
Speaker Change: And are making progress on that dimension, given our recent launch of dash for business.
Speaker Change: While it will take time for our collective investments to translate to revenue growth.
Speaker Change: Confident in our ability to drive sustainable levels of free cash flow in the years ahead.
Speaker Change: Ultimately, we believe that our efforts will culminate in creating long term value for our shareholders.
Speaker Change: With that operator.
Speaker Change: Please open the line for questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question.
Speaker Change: Please press star one again.
Please standby, while we compile the Q&A roster one moment.
Speaker Change: And our first question comes from Brent Thill of Jefferies. Your line is open.
Speaker Change: Thank you this does love soda on for Brent Thill.
Speaker Change: Thank you drew and thank you Tim for the for.
Speaker Change: Taking my question.
Speaker Change: <unk> grew to start out with you I just wanted to ask.
Speaker Change: It's.
Speaker Change: Great to see the tactical business announcements could you maybe talk a little bit about.
Speaker Change: How that is differentiated from some of the other.
Speaker Change: Offerings in the market.
You noted that it's a competitive market out there. So just talk a little bit about how that is different.
Speaker Change: Sure.
Speaker Change: So versus other folks in the space.
Speaker Change: A bunch of advantages. So one is just the product differentiation and we're seeing that with <unk>.
Speaker Change: In particular, the protect and control capability that dash has is unique and.
And addresses a major pain point that we have.
Speaker Change: We see most of our customers and prospects experiencing as they want to rollout.
Speaker Change: Not just things like dash or search budgets AI in general.
Speaker Change: Hum.
Speaker Change: Lot of Admins recognize there's a lot of improperly shared stuff in any given company and.
Speaker Change: And there is no good way to have visibility into what shared across multiple content platforms and there's no way to have.
Speaker Change: Universal governance across platforms and so.
Dash gives desk business gives admins that capability for the first time and that was ceded from an acquisition of a company.
Speaker Change: Called nearer.
Speaker Change:
Speaker Change: That identified that opportunity more broadly and as there are number of other dimensions of product differentiation and more youll see next year.
But we have a number of structural advantages too so our scale and our distribution.
Speaker Change: Our big advantage. So we have over 500000 business accounts.
Speaker Change: And the better part of 20 million subscribers on Dropbox, and so we have a big home field advantage with our FSS customers who view.
Speaker Change: Dash and organizing your cloud content is a natural extension.
Speaker Change: Taking care of your files.
Speaker Change: And then versus some of the other folks like Microsoft or Google or the or some of the incumbents.
Speaker Change: This platform agnostic designed from the ground up to work across every ecosystem where to date when you look at it.
Speaker Change: Some of the copilot type offerings.
Speaker Change: They are often limited to within their own ecosystem. So for example, you don't really see like great because Google slides support.
Speaker Change: <unk> for example, but dash is designed from the ground up to be platform agnostic and you have to really design that from the beginning it's hard to bolt that on later.
Speaker Change: And we see across the board with Dropbox is.
Speaker Change: Trust and trust brands privacy brand.
Speaker Change: Is.
Speaker Change: It's going to be a big advantage for us because when we talk to customers. We see a lot of apprehension here a lot of apprehension.
What happens to your data when use AI and I think none of us really want our stuff.
Speaker Change: Our information our company's information.
To be used.
Speaker Change: For other purposes, like better AD targeting or for training. The next foundation model. So the fact that.
Speaker Change: We self host our AI by defaults in.
Speaker Change: And how it can make strong assurances and guarantees about.
Speaker Change: The privacy of your data that's a big advantage and then.
Speaker Change: Because we store literally trillions of pieces.
Speaker Change: Content on Dropbox, and all of the technical infrastructure that that entails.
Speaker Change: To be a big advantage for us to and the last thing I'd say.
Speaker Change: Is the other competitors are pretty enterprise focused.
Speaker Change: And so we have a particular advantage with the SMB.
Speaker Change: And mid market audience that are that where we've been where we succeeded in FSS and that kind of self serve and viral motion.
Speaker Change: We see a big opportunity to do well there too.
Speaker Change: And see that is a completely greenfield opportunity.
Speaker Change: So lots of advantages excited to get out for next year.
Speaker Change: Got it that's super helpful. I, just wanted to quickly follow up on that.
Speaker Change: So just.
Speaker Change: It would be helpful. If you could frame the monetization opportunity on dash.
Speaker Change: And given you know.
Speaker Change: The team customers seems to be a little more price sensitive.
Speaker Change: Could you talk a little bit about how.
Speaker Change: How much do you think this could translate into <unk> monetization I know, it's super early but any any indication would be super helpful. Thank you.
Speaker Change: Yeah. So I mean, a couple of things I mean the day.
Speaker Change: Each market is has some pretty different dynamics.
Speaker Change: Then the FSS market, maybe firstly just maturity so.
Speaker Change: And because of the competitive landscape in category maturity in FSS.
Speaker Change:
Speaker Change: It contributes to some of that price sensitivity.
Speaker Change: And the fact that we're you know in many cases, we're competing against an offering that's bundled for free or I'd note a no added cost for the office suite.
Speaker Change: You don't have those dynamics with Dash and then second.
Speaker Change: We are very excited about the size of this potential market I mean, it's very rare you meet a customer that doesn't have these challenges around fragmentation and information overload and having trouble finding their stuff at work.
Speaker Change: Or the security and governance challenges I talked about with I T.
Speaker Change: And so we see.
Speaker Change: Even though we're very proud of the scale that we've built with our FSS business a couple of billion in revenue.
Speaker Change: Half a million more than half a million business accounts.
We think the opportunity even larger with.
With the kinds of unmet.
Speaker Change: Unmet needs that dash addresses in.
Speaker Change: There is 1 billion knowledge workers out there none of them have virtually none of them have any solution to these problems and.
Speaker Change: And so it's a green dot greenfield opportunity for us.
Speaker Change: Got it thank you so much.
Speaker Change: Yes, sorry, just one more thing on just on pricing in general I mean, its pretty early I mean, we're still iterating.
Speaker Change: But.
Speaker Change: But early signs as we expect it to be accretive to ARPA.
Got it thank you.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Richie Deloria of RBC capital markets.
Richie Deloria: Wonderful. Thanks, so much for taking my questions, maybe I want to ask a dual pronged one still sticking with dash.
First part and these are both related but the first part is maybe help US understand this is a competitive space you've got well funded venture back companies that are achieving real scale. In this what do you feel uniquely gives dropbox a right to win especially at the enterprise.
Speaker Change: Level, which is arguably the biggest Tam and this is and then the second part to that is Joe Youre, making a really big bet on the future of the company and understand that right I mean thats what it is.
Speaker Change: The history of entrepreneurship is rife with.
Speaker Change: I guess number one what gives you confidence that this opportunity can materialize and number two what's kind of the contingency plan or our thought process. If just the demand for dash and for these new growth drivers don't materialize. The way that you think they will thank you.
Speaker Change: Yeah.
Speaker Change: Sure. So I think one thing that's different about dash is its proximity to our core business.
Speaker Change: And then the magnitude of the opportunity so I've talked a little bit about the magnitude I mean, we see.
Speaker Change:
These challenges around information overload.
Being universal and.
Speaker Change: And we see that a lot of what you do to kind of organize all your.
Speaker Change: All your cloud content.
Speaker Change: It builds on our strong foundation of first organizing many millions of people and companies files.
Speaker Change: And so certainly with our existing FSS customers.
Speaker Change:
Speaker Change: When I talk to them. They all look they are apprehensive about AI for some of the reasons I covered like what happens my data.
Speaker Change: And there's a lot of hype and Theres a lot of concern that.
Speaker Change: Which of these products are going to work as advertised or what what happens my data all these kinds of considerations and so there's a lot of enthusiasm.
Oh, I see when I talk to our customers that there is a lot of enthusiasm about extending the value we provide in and they see it as a natural extension I see dash is a natural extension of what Dropbox already doesn't.
Speaker Change: And I think we're all looking for services that we can trust as we adopt all of these new AI tools.
Speaker Change: <unk>.
And then more broadly this is I mean, the other differences.
Drew Houston: Think about dash is kind of solving a lot of the same problems I started dropbox yourselves. So I mean, the beginning I started the company because it kept forgetting my thumb drive.
Drew Houston: But the question I was really asking is like why is it so difficult to find and organize and share and secure my stuff.
Drew Houston: And in a lot of ways, we're sort of solving the 2024 versions of those same problems lots of challenges finding organizing and sharing.
Your cloud content in a world, where you know a lot of your work happens in the browser and Theres a lot of new value you can provide there wasn't possible before jennie.
Drew Houston: Jenny I came along.
So did we see.
Drew Houston: We see both confirmation of validation from our existing customers you see the market developing and other folks in this space of course you'd expect that.
Drew Houston: You see revenues starting to scale, you see lots of investment heading into the space.
Drew Houston: And so we think we are.
Drew Houston: We're arriving right at the right time to.
To capitalize on this and if things don't work, we'll continue iterating.
Drew Houston: But we see this as generally.
Drew Houston: A pretty linear evolution of what we do and that builds on our existing strengths.
Speaker Change: Alright very helpful. Thanks sure.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Mark Murphy of Jpmorgan. Your line is open.
Speaker Change: Hi, This is Jason <unk> on for Mark Murphy. Thank you for taking my question.
Speaker Change: Just with the recent announcement of the head count reduction could you guys talk a little bit more about how you're approaching hiring going forward and <unk> restructuring and how are you what steps youre, taking to ensure that dropbox remains agile work.
Speaker Change: While pursuing long term thank you.
Sure.
Speaker Change: Well I mean, it's it.
It's really difficult decision to reduce head count and do the kind of restructuring we did.
Speaker Change: <unk>.
Speaker Change: And as you would imagine that's in service.
Speaker Change: Or a difficult decision like that is both in service.
Speaker Change: Of note.
Speaker Change: They're not having to make this kind of adjustment again, and then also to set.
Speaker Change: To best position Dropbox.
Speaker Change: For its next act in getting.
Speaker Change:
Speaker Change: Getting dash to win so some of them more specific differences or changes are.
Speaker Change: As far as how we are approaching hiring so I mentioned that this wasn't just a head count reduction or a cost optimization. This is really a redesigning our organization to be flatter and leaner and more balanced.
Speaker Change: And it's not just a onetime.
Speaker Change: Effort. These are as you know kind of a permanent way that we operate in having a lot of controls to make sure that.
Speaker Change: The organization.
Speaker Change: The organization shape in layers and everything.
Speaker Change: Stay within bounds as we hire.
Speaker Change: Now part of this is also we will reinvest.
Speaker Change: Some of the.
Speaker Change: Yeah.
Speaker Change: Some of the cost that we cut in <unk> and <unk>.
Speaker Change: Particular, as you'd imagine theres a lot of specialized talent that we need for dash and for our future products around.
Speaker Change: Ml engineers around deep search expertise that kind of thing.
Speaker Change: But I think it's also an indication that we're going to balance all of these considerations. We are focused on in growth and investing for growth and capitalizing on.
Speaker Change:
Speaker Change: The opportunity in front of us, but we're also be disciplined with our spending in areas of the business where.
Speaker Change: We're seeing more category maturity or gross headwinds.
Speaker Change: Then we'll focus more on efficiency and cash generation.
Speaker Change: So we'll always be balancing all three factors.
Speaker Change: And maybe just to add briefly elaborate from a numbers perspective, we're not offering precise guidance at this time, but we do expect 25 non-GAAP operating margin expansion of about 150 basis points compared to 2024.
That includes some of the offsets that you've talked about as far as.
Speaker Change: The annual merit increases as well as the investments, we'll be making across both R&D and sales and marketing skill dash and some backfill ing will be doing relative to select positions subsequent to the risks and.
Speaker Change: A quick reminder, 24 also benefited from a $30 million tailwind.
Speaker Change: Due to the extension of the useful life of our data center hardware, where we won't see that tailwind again next year.
Speaker Change: Okay.
Speaker Change: Thanks, guys. That's all for me.
Speaker Change: Thank you as a reminder, if you have a question. Please press star one line.
Speaker Change: I'm showing no further questions I would now like to turn it back to Peter Stabler for closing remarks.
Speaker Change: Okay.
Peter Stabler: Thank you everyone for joining us today, we look forward to speaking with you next quarter have a good day.
Speaker Change: This concludes today's conference call. Thank you for participating and you may now disconnect.
Speaker Change: Yeah.
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